Summary

The Kenya Bankers Association’s (KBA) cost of credit report indicates that the big banks, in terms of assets and customer base, are offering borrowers the most expensive loans despite incurring the lowest cost of funds compared to their smaller rivals.

This means the cost of taking a Sh1 million loan at Victoria reflects pure interest payments at the current maximum lending rate of 14 per cent.

The KBA data confirms that most borrowers are more concerned with ease of getting credit than its cost, a trend that has seen lenders charge different rates based on their customers’ profile.

Big banks are Kenya’s most expensive lenders

Kenyan borrowers looking for commercial bank loans have a high chance of getting the best-priced deals from small lenders, a newly released report shows.

The Kenya Bankers Association’s (KBA) cost of credit report indicates that the big banks, in terms of assets and customer base, are offering borrowers the most expensive loans despite incurring the lowest cost of funds compared to their smaller rivals.

The KBA data, which has been made public on a new website www.cost-of-credit.com, shows that Barclays Bank of Kenya #ticker:BBK , Equity Group #ticker:EQTY and NIC #ticker:NIC Bank top the list of lenders with the highest total cost of credit, while bottom-tier banks Victoria and Guaranty Trust Bank (GTB) offer the cheapest loans.

The ranking is based on a tabulation of what it would cost a borrower to repay a Sh1 million unsecured loan over a period of 12 months.

The KBA data shows that the higher cost of credit by the big banks arises from the numerous and larger non-interest charges, including appraisal and processing fees, on the loans.

A Sh1 million one-year loan from Barclays, for instance, will cost a borrower Sh135,245, including a Sh57,800 fee that is equivalent to 42 per cent of the total cost of credit.

Borrowing the same amount of cash from Equity Bank will set one back Sh132,445, including fees of Sh55,000. NIC charges Sh121,445 for a similar amount, including a non-interest fee of Sh44,000.

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At Victoria, the cheapest of the 32 lenders in the KBA database, a similar loan costs Sh77,445, largely because the lender charges no fees on the loans other than interest as prescribed in law.

This means the cost of taking a Sh1 million loan at Victoria reflects pure interest payments at the current maximum lending rate of 14 per cent.

GTB comes in a close second with a total cost of credit of Sh77,555 — a figure that includes a Sh110 fee.

Analysts say the lending dynamics reflect small banks’ efforts to win over clients from the big players with a huge market power that allows them to charge higher fees.

“Small banks don’t have the bargaining power that large lenders have,” said an investment analyst who did not wish to be named because he does consultancy work for the industry.

“Big banks are also been keen to avoid further erosion of their margins following last year’s capping of lending rates,” he said, adding that the lenders’ larger economies of scale should ordinarily allow them to charge lower fees but they have not done so.

The effect of the higher bank charges on profitability is even more pronounced on shorter-term loans that allow banks to increase the frequency of the fees that appear only once on long-term credit facilities.

Equity, the country’s largest retail bank, for instance charges Sh5,000 for a one-month Sh100,000 loan. This brings the total cost of such credit to Sh6,667, of which only 17.5 per cent is interest.

Annualised, the repayment cost amounts to more than 80 per cent of the principal, according to the KBA data.

This may explain why major retail banks, including Equity and #ticker:KCB, reduced the repayment period for most of their mobile phone-based lending to one month after the law capping of interest rates came into force in September 2016.

There are, however, differences among the big banks, indicating competition for customers at the top of the lending market.

Co-op Bank#ticker:COOP is ranked eleventh with charges of Sh27,539 for a Sh1 million personal unsecured loan for one year, raising the total cost of the loan to Sh104,984.

KCB Group — the country’s biggest bank by assets — charges Sh27,500, to issue the sa. which brings its total cost of credit on the facility to Sh104,945.

I&M Bank #ticker:I&M is even cheaper with a total credit cost of Sh88,445, including charges of Sh11,000.

The KBA data confirms that most borrowers are more concerned with ease of getting credit than its cost, a trend that has seen lenders charge different rates based on their customers’ profile.

Rafiki Microfinance Bank, for instance, is charging 28 per cent for a Sh1 million one-year personal unsecured loan, placing the total repayment cost at a Sh191,072.

For Rafiki, interest income is the most important income stream at 82.7 per cent of the debt burden.